Public companies purchase their own shares all of the time, “stock buybacks”. The shares become treasury stock, and the value of the shares on the market increases proportionally. What would happen if a company managed to purchase 100% of its own shares? Ignoring the fact that the last guy probably wouldn’t want to sell, if all of the shares of the company are treasury stock… who owns the company?
Wouldn’t it just become essentially a non publicly traded company, for all intents and purposes identical to a company that had never issued stock in the first place?
It is possible to take a company private, which means that all shareholders are cashed out or have their shares exchanged for some other company, and the shares cease to exist. This is what is more likely to happen. Some sort of approval will be required, for instance maybe a majority vote by the existing shareholders. Usually, the company will have its ducks in a row and be able to obtain the needed approval before trying it.
For instance Seagate went private in 2000. In 2002, it went public again under a new symbol, STX. Silver Lake, a private investment firm specializing in technology companies, was involved in the deal to take it private, as was Veritas, which became the principal owner. I believe some of the shareholders who got cashed out (actually I think they mostly got Veritas stock) were peeved.
Non-publicly traded companies are owned by someone. In the OP’s scenario, the company ‘buys’ itself with its profits. It’s not the same as just becoming private, where at least some of the shareholders retain their share of the company to become its now private owners.
A guess: the scenario posed by the OP is impossible. For the company to “buy itself” it would have to use its own capital. But the capital is presumably reflected in the price of its shares, so a company almost by definition never has enough money on hand to purchase all of its existing shares.
The Tribune (Chicago Tribune, LA Times, WGN, KTLA, WPIX etc etc) was public then bought back most of its shares and went private.
You don’t need all the share, just enough to control the vote.
Publicly traded companies are subject to SEC rules and private companies aren’t. So if you were buying back your stock you’d want to go private officially.
But again you don’t need to buy back all your stock, just enough to control it. Sometimes it isn’t worth it. CBS got into a load of debt when Ted Turner tried to take over the network and CBS had to buy its stock (well enough of it) to prevent the take over. This left CBS hurting for quite a while and lead to its deal with Westinghouse.
Most of the answers posted seem to be about going private. Some of them are accurate, but this question isn’t really about going private. As somebody pointed out, private corporations don’t hold all its shares in treasury stock. Rather, the shares are held by anyone - real people, partnerships, corporations - but they’re not traded on a public stock exchange.
Treasury stock on the other hand is just the shares of stock repurchased by the corporation. Again, they exist whether the corporation is private or public. A public company can issue new shares with a public issuance or a private company might issue new shares to a new CEO as an incentive, for example. In my latter example, none of the existing shareholders desire to actually sell their own shares, they want the new CEO to own a few as compensation for running the company. By issuing new shares, all the shareholders are obviously diluting their real ownership, but they aren’t actually exchanging any of their shares to the new CEO. The CEO’s shares are newly issued.
Buying back stock is the process in reverse. Shares are bought back and retired or returned to treasury stock, and everyone who doesn’t sell owns relatively more of the company than they did before. The shares are relatively more valuable now too, since there are fewer outstanding.
So the question is “what happens if the company buys back ALL shares outstanding”, and I think there isn’t an answer. The question seems absurd on its face. A company’s treasury stock can’t exceed a maximum quantity of total capitalization as specified by the law, but even if there wasn’t a law it wouldn’t make any sense for it to be 100%.
No, indeed not; buying back all outstanding shares is equivalent to liquidation, not privatization.
Businesses–even healthy ones–liquidate all the time, but they must do it in an orderly manner which protects the claims of creditors against the company’s assets. You can’t allow the shareholders to drain off all of the cash and then say, “Sorry–we’re closed.” Any attempt to buy back all outstanding shares of a publicly traded corporation would be highly illegal.
In a normal world, it can’t happen. If Spacely Sprockets has 2 million shares of stock out at $1 each and somehow buys half of them for said $1, then the remaining stock should now trade at $2. If Spacely tried to then sell those stocks again, the price would drop. So it’s a bit like Achilles and the Tortoise, the more stock Spacely buys, the more valuable the remaining stock becomes.
Unfortunately, the actual stock market doesn’t behave logically (well duh!). So over a short term, a company might actually find itself in a position where buying/selling it’s own stock can be financially quite rewarding. But to the point of actually buying every last share of outstanding stock? That would be mega-bizarre by even Wall Street standards.
Hypothetical: Cogswell Cogs has been selling the WizBang 1000 for a few months and sales are astounding. The demand is unbelievable. While duly noted in the quarterly reports, the stock is just sitting there. So Cogswell Cogs starts buying up its cheap stock. Microsoft has done this at times when the stock lags compared to forecast sales.
Funny Seagate should be mentioned in this context. Several years ago Seagate owned a good size chunk of the backup software company Veritas. For a while the value of Seagate’s stock in Veritas was greater than the value of Seagate’s stock itself. And open discussion of this fact didn’t change the values of the stocks! Similarly 3Com and Palm at one time. So Seagate had the resources to actually buy itself (on paper).
What’s the difference between that scenario and an LLC?
A limited liability company is just one of many types of non-publicly-traded-corporation entities.
I heard a rumor that DeBeers had some kind of weird reciprocal ownership with a holding company, but that company is rife with conspiracy theories floating about…
If you assume that the market cap is based on a realistic valuation of the company, then it doesn’t make sense that a company that buys half its shares back would keep the same market cap. After all, whatever SS did to raise that $1 million must have cost them $1 million, either in cash reserves or in sold-off capital. After they did that, they’d have half the value (less, probably, due to economy of scale and inefficiencies), and each outstanding share would still be worth about as much. If you got down to the last guy with one share, he’d probably be the proud owner of the remaining 2 days on the lease and the coffee pot that none of the employees took with him.
So, like Freddy the Pig said, buying back all the shares would effectively be a liquidation.
LLCs are legal entities but they aren’t corporations, and they don’t issue stock. Instead of shareholders it has members who have a right to a certain proportion of the LLC’s profits. Membership in an LLC may or may not be easily transferable, depending on the local jurisdiction’s regulations and the LLC’s membership agreement.
I started to write a response with an example, but then… I can’t believe that I goofed up something this easy. Yup, liquidation it is.
What if, for simplicity’s sake, a publicly held company, XYZ, had two shareholders, each with 50 percent of the stock, and the company repurchased the stock of one of those shareholders. Now there’s one shareholder, who dies of shock. His will bequeaths his XYZ holdings to the company.
What would happen?
This strikes me as equivalent to having an out-of-date will in which one bequeaths all of one’s property to someone who has already died. Since there’s unikely to be any provision in the state probate code addressing this particular situation, that bequest would probably be found to have “lapsed,” i.e., to have dropped out of the will. The XYZ shares would pass to the decedent’s residual legatee – the person to whom “all the rest of my property” is bequeathed. If there is no such person, then the XYZ shares might be divided among the decedent’s statutory heirs (children or other various family members).
Here’s a different way to think about it:
Corporations are run by boards of directors, each of whom are usually shareholders in the corporation. The decision to buy back publicly held shares is made by the board of directors. Those directors are never going to decide to have the corporation purchase their own shares.
Buying back stock is a way of concentrating ownership – when ownership is sufficiently concentrated in the hands of management they have no further motive to purchase treasury stock.
Think about it this way: A corporation has 200,000 shares of stock. 100,000 of the shares are held by the board of directors. 100,000 are held by the public at large. The board votes to repurchase 100,000 shares. The board doesn’t sell it’s shares back. Now there are only 100,000 shares outstanding, all owned by the board members. Now nobody on the board has a motive to vote to repurchase any stock (unless they’re trying to take it away from another board member. And even in that case, eventually you’d get down to a single shareholder who would have no reason to have the corporation repurchase his own shares.)
Buying back shares is a way to reduce the number of owners so the remaining owners have a greater stake. Once there’s nobody left to cut out of the picture there’s no reason to buy back shares.
Interesting, but you’re making the assumption that control and ownership of the company is still more valuable to the board than the money they might make from a sale. If the company has a lot of cash on hand, but subtle liabilities, (financial or legal,) that might not be the case.
I’d suggest the flipside. Any one board member might sell his shares back to the company - his way of ‘cashing out.’ But - there always needs to be someone who still owns his or her own shares after the purchase is completed, to approve the purchase from the company’s point of view. This can’t be done for the company to purchase the last outstanding share.
It’s really a mistake to merge the identities of the shareholders and the board. The shareholders appoint the board of directors to run the company. It is certainly possible to have a board entirely composed of non-shareholders.
It’s a positive sign to stockholders for a company to buy back some of its publicly traded shares. The message is that management views the value of the company to be greater than its current trading value. Buying back enough shares to de-list (a going private transaction) is a different set of motivations that go beyond the OP.
So for purposes of the OP, we’ll just accept the motivations are met, put aside the legal considerations (tender offer rules, capitalization rules, fiduciary duties to minority shareholders, etc.) and assume a company buys back enough shares to be left with one shareholder. At that time, the remaining shareholder controls the corporation. As a practical matter, the company cannot compel him or her to do anything, certainly not sell his or her shares back to the company – creating some sort of legal abomination. The corporate form does not work without shareholders.
If the last shareholder desired to cash out, he or she would liquidate the company. As a simplification, assets are sold off, creditors are paid and sufficient reserves are left for unpaid creditors, and the rest of the cash is distributed to the shareholder.